Essay Simulation and modelling Building & The Economic Performance, GDP – Economics Assignment Help

Assignment Task

SIMULATION AND MODEL BUILDING 

Background:

P relates to the following scenario; the context being the economic performance (as measured by GDP) of two fictional countries; Country A (which is a large, stable, industrial country) and Country B (which is a smaller, less developed and therefore more volatile country). The two nations (countries) are not identical in their economies nor in their productive capacity or industrial composition and therefore have both independent economic cycles and differing economic growth profiles. 

Reuired

To clarify, in normal circumstances (ie. average, see table above) country A’s GDP will grow at a rate of 2.10% per annum, and country B’s GDP will grow at a rate of 3.15% per annum.

Both nations, with the objective of frugality, have entered into a mutual agreement such that their central bank operations will be under the auspices of a single institution (being the Central Bank and which is the institution that you work for). To monitor the relative performance between the two countries, the central bank monitors the exchange rate, the annual value for which is defined as the ratio of country A’s level of GDP in that year to country B’s level of GDP in that year, viz;

The central bank, in it’s role of providing fiscal policy stimulus, can therefore simultaneously provide stimulus exclusively to one country, exclusively to the other, or some combination. For example, the most neutral stance the central bank could adopt would be to apply equal stimulus to each country; that is;

Fiscal Policy stance = Stimulus A: Stimulus B = 50:50

If a neutral stance is adopted, the growth rates in GDP for each country are as they appear in the probability distribution function (pdf) table above.

Alternatively, the central bank could decide to alter their stimulus such that it was in favor of country

A, according to Fiscal stance = Stimulus A: Stimulus B = 55:45. The R&D expenditure budget will have an impact on the GDP growth for each market. That is, for every 1% difference in stimulus the distribution of growth rates will change by 0.25%. For example, the stance of 45:55 will shift the distribution of country A’s GDP growth rates upwards by 0.25 x (55-45) = 2.5%, and the distribution of country B’s GDP growth rates downwards by 0.25 x (45-55) = -2.5%. Further, the impacts of a country being in a depression or hyperinflation state are somewhat persistent, with countries remaining in the depression state for 4 years and for 3 years once entering a hyperinflation state.